Leroy Seafood Group ASA

OSE:LSG

Earnings Call Transcript 2018-Q4

[Henning Kolbjørn Beltestad, Group CEO]

Welcome to Fourth Quarter Presentation for LerøY Seafood Group. My name is Henning Beltestad, CEO in Lerøy Seafood Group and with me today is Sjur Malm, CFO. First of all, I will take you through highlights in the quarter, then Sjur will take you through the key financial figures, and then I will come back for the last points -- outlook, a look at the supply and demand of salmon.Fourth quarter has been a good quarter with EBIT before fair value adjustment of NOK 948 million. Harvested volume is record high 49,414 tonne -- 49,000 tonne. EBIT all-inclusive of NOK 18.1, a contract share in the quarter of 23%. Net interest-bearing debt, end of the year of NOK 2.5 billion. Harvest guidance, we keep at 174,000 tonne. And proposed dividend is at NOK 2 per share. Lerøy Seafood Group have had good development in the turnover and for year 2018 close to NOK 20 billion. Also we see that the fourth quarter is a fairly good quarter also compared to the past quarters, even though we feel that the potential should be a little bit higher than NOK 950 million achieved in fourth quarter. We report in 3 segments, Farming, Wild Catch and VAP sales and distribution. We can start with the Farming highlights. The spot prices in fourth quarter is higher than last year. The NSE spot price is NOK 55.40 fourth quarter '18, compared to NOK 49.30 in fourth quarter '17, so up 12%. And also it's up NOK 1 compared to third quarter, and NOK 6 up compared to the same quarter. The trout price achievement unfortunately has been very low in this quarter due to significant challenges with downgrades due to matured trout. So the quality of the trout has not been as it should be. The color in the meat has been too low, and that has given us a much lower price achievement than the salmon. The contract prices is above spot prices in the quarter. The cost is down compared to third quarter and also compared to fourth quarter 2017. If we look at biomass at sea, end of '18 was 110,000 tonne and is 2% down compared to '17 where we had 112,000 tonne.If we look at the Farming volumes. As I said, we keep our guidance for 2019. If we look at the conclusion for 2018, we had about 37,000 tonne in Lerøy Aurora; about 66,500 tonne in Lerøy Midt and 58,800 tonne in Lerøy Sjøtroll, so a total of 162,000 tonne. And if we look at Norskott Havbruk, a Scottish sea farms, our share is 13,700 tonne. So a total of close to 176,000 tonne in 2018, and 189,000 tonne in 2019. Wild Catch. It's been a fairly good quarter. Harvested volume of 11,500 tonne compared to 12,300 tonne in Q4 '17. There's been a decrease in catch of cod for the year. The average price in the quarter is 11% up, and the price for cod is up 20%, and haddock 17% and saithe up by 10%. On the industry side, it's been more challenging, of course, with the adjustment in prices and increase in raw material price. It's a challenge for the processing units in the group.If we look at VAP sales and distribution, it's been positive development in the quarter. It's been a challenging year for this segment, especially the first 3 quarters, but 4 quarters has been very positive. And we see a gradually more and more positive effects from being a full-fledged and integrated supplier. We see that our investments in downstream activities is improving step-by-step. And the EBIT for fourth quarter '18 is NOK 134 million compared to NOK 122 million in fourth quarter '17.And then I give the word to Sjur, which will take you through the key financial figures.

[Sjur S. Malm, Chief Financial Officer]

Yes. I will then talk us through key drivers in our financial figures. We think ourself we should have been done a little bit better this quarter. I think looking into deviations, one is on trout. We have downgrades on trout of NOK 12 on 8,000 tonne of trout, which is about NOK 100 million. On top of that, we had slightly lower growth than what we had expected on the autumn 2017 generation, which also has a significant impact, which impact then our harvested volume this quarter. But also our cost this quarter and also first half next year and then particularly in Central Norway. Looking into the figures. Main drivers are still in our redfish business. We can see harvested volume in the quarter is, as Henning has pointed out, up 17%. This is the highest quarterly harvest volume we've ever seen. We have a lower cost position. We have a slightly better price achievement, but a disappointment on trout, which is why the profitability per kilo is not more up. And in some, we see that our operating profit is up [ 22% ] compared to last year. We continued to have the steady flow of income from associated company. Net finance is down and our pretax profit is then up 25% as well as our EPS in the fourth quarter. So overall a good quarter, and overall among the best quarters in our company's history, but it should have been slightly better. Looking at the year as a whole, we harvested the highest volume of redfish ever in the company. We are seeing a positive trend on cost. Price realization on salmon is about the same level as last year, while we're down NOK 6 on trout, which is why our EBIT kilo is not up despite cost decrease. In some, this gives us the operating profit not too far from last year, down 4%. Income from associates is about the same level. We have reduced our financial cost and in some, you can see that the profit per share is exactly the same level as last year. Looking into our balance sheet. I like to point out 2 key factors. One is the substantial investments we are doing in fixed asset. Those include a new factory in Central Norway. It includes new smolt facilities in Hordaland and new smolt facilities in Northern Norway. And these are substantial investments, which are not helping our profitability in 2018, but our investments that will spur growth for the future. That's why tangible fixed assets are up from last year. Another point is the inventory side. We are increasing our business within whitefish. Redfish are more fresh volumes, in the whitefish value chain there are more inventory and more frozen parts. And given positions we have taken in our whitefish business, we have a higher inventory level going into '19 than into '18. We are happy with those positions, but they do impact then inventory level and then also our cash flow. We see overall, we have a, what at least we believe, is a strong balance sheet. Net interest bearing debt of around NOK 2.5 billion. This shows the amortization schedule and covenants, and we believe we have a good schedule and we're well within our covenants. Then looking to cash flow. Key points this quarter relates to -- normally, we would have seen a higher working capital release as we saw last year. This relates to inventory build I just commented upon. We can also see our CapEx is significant this quarter, but in some that we reduced our net interest bearing debt by just over NOK 500 million in the quarter. Looking at the year, it's been a good cash flow year. We can see that we have paid NOK 850 million in taxes. We built working capital, among other, then in the inventory side. We have invested more than ever before in projects we believe will have a good return. We paid the highest dividend in the company's history. And comparing 2017 and 2018, we have a slightly higher debt position, but the level we are happy with. Looking on return on capital employed. Let us state the target was 18% when listed in 2002. Company has been averaging about that since the early '90s. This is still our aim, and we believe the investments -- particularly larger investments we're making in smolt has at least this potential.Looking then on dividend. Proposed dividend is NOK 2 per share, significant increase from last year. We can see on the left-hand side the kind -- absolute amount of dividend, which is steady and increasing, which is also part of the aim of the board. Dividend yield is around 3%. Then looking at volumes. Henning has showed the revenue development in Lerøy, which clearly shows that Lerøy is growing. This, I read -- and sometimes we read that Lerøy is not growing and hasn't grown since 2012, and that's not true. It's true that the redfish business, which is the consolidated volume shown here, has been pretty stable since 2012. But it's also true that we made a largest acquisition in our company's history in 2016, which added what is shown here, catches on quarter some -- close to 70,000 tonnes. But on top of that, added 40,000 to 50,000 tonnes of third-party volume from Norwegian coastal fleet. And in some, Lerøy is handling some 35,000 to 40,000 -- 350,000 to 400,000 tonnes of raw materials. And then some 100,000-plus tonnes from third parties. That makes us the largest exporter out of Norway and one of larger players in seafood in Europe. We believe we have a strong raw material base, and we also believe, we have taken significant steps in developing relationship with key strategic customers over recent years. So we believe we have, kind of like the framework for value creation also in the time to come. Henning has touched upon this. What we can see is that the reason why we make more money this year than in fourth quarter is due to higher profitability in Farming. Looking into each segment, this is another healthy quarter from Aurora. Costs are lower than in third quarter, but higher than last year, but in line with expectations. And I would say, a healthy year for Aurora. I think the most -- by far the most dramatic thing in Aurora happened post end of 2018, and we saw fire in the company's smolt facility in February of this year. Unfortunately, one employee working for a subcontractor saw a fatal accident. And obviously, everything else is difficult to comment compared to that. But looking into the operational impact, we also lost 2.6 million smolts, and there was significant material damage. We are well insured. we will see slightly higher cost first half of '19 due to this fire. We have started rebuilding and we have been able to gather most of the smolt to replace what is lost, albeit we might see a slightly later release. Yes, we were originally planning to release in April. Now it might be May or June. But then in some, kind of, like the impact on the financial and operational side is not huge. We were planning to grow some 10% in 2020 due to smolt investment, that is likely postponed to 2021, and best indication today is that we see a level in 2020 on par with '18 and '19.In Central Norway, we have seen a positive cost development through '17 and '18. Costs now in Q4 are slightly higher, that relates to the fact that we have seen a slightly lower production of biomass in the autumn '17 generation. So costs are a little bit higher, not much, but a little bit higher than what we expected. And we are -- have a little bit less fish to divide the cost on in this quarter and also then first half next year. But we do expect to see then higher costs first half than second half, but -- yes, there is potential for improvement in costs also going into 2019.In '18, we also opened and started what is -- at least what we believe, is the world's most technology advanced processing facility for salmon. The aim is that the fish should not be touched by hands. We are not there yet and this facility has been in startup in '18, and we do expect to see -- and we are seeing improvements now going into '19.Hordaland, we do have a positive development in cost. We had the lowest cost for quite some time, but unfortunately we had then challenges in quality on trout and maturing fish, meaning it loses color. So that has a substantial impact on profitability this quarter. Bigger changes in Hordaland is a new smolt facility, which we started 2 years ago. Soon finished. And we'll start seeing first fish out of it now first half '19, and we will also start seeing significant releases of larger smolt towards end of '19. So in 2019, on salmon smolts, more than 25% of fish released in Hordaland will be larger than 500 grams. In 2021 dependent on the mix between trout and salmon, some 40% to 50% will be salmon -- will be larger than 500 grams.Looking into Wild Catch. It's difficult to look quarter-to-quarter, but kind of like looking on annual trends, it's probably the easier. We can see that we have a slightly higher EBITDA this year compared to last year. We have high amortization among others because of the new boat, Nordtind. And we see that operating profit is in line with last year. Key drivers on the catching side is that there is low quota on cod and haddock. That has been replaced by higher catches of shrimps where the new boat has been important. And we also see that there has been higher prices in '18 compared to '17 on a lower volume. So on catching side, this has been a good year.Looking into the land industry, Norway Seafoods. It has been a challenging year given the fact that there is less volume available and the prices are higher, and those prices take time to move onto end customer. So in summary, I would say in line with our expectation, there is significant work to be done, significant investments needed in the land-based industry. We are doing those step-by-step trying to -- or we are not trying to, we are targeting clearer what should be made in each factory. And we have clear improvement initiatives in some of the larger facilities. So we do expect to see gradual improvements during 2019.Scottish Sea Farms, Norskott Havbruk, another good quarter, healthy margin at NOK 24, good production, slightly higher harvested volume in '18 than previously communicated. But all-in-all, a satisfactory result. We are building a new smolt facility also in Scotland, and we will see first release autumn 2019. So another good end -- good quarter from this, I would say, stable performing operation. Downstream, Henning has already touched upon. We have a high activity level in 2018. We have a lower profit level than what we -- is our aim. It is very positive that towards in Q4, we have a significant lift in profitability and margin, and this quarter is better than last year.We expect to see a better 2019 compared to 2018, and building it up step-by-step, quarter-by-quarter.

[Henning Kolbjørn Beltestad, Group CEO]

Okay. Then I am going to take you through the outlook.First of all, we start with the supply side. And this is new numbers from Kontali. And if we start on Norway, we see that there will be an increase in Norway this year -- our growth in Norway this year of close to 6%. We see that U.K. is coming back now, an increase of close to 17% after a year 2018, where we had a negative growth of 13%.And -- yes, so a total growth estimate for 2019 of 7.3% in Europe, and globally, increase of 5.6%.Yes, and the update on the quarters. We see very volatile prices going back the last 3, 4 years. We see that we had a price in fourth quarter '18 of around 55, and we see that it's been a good start in 2019 and per week 7, it's price of 58,which is -- and it's lower than first quarter '18, but we will see getting closer to Eastern Norway. It might be that we will see a positive trend in prices for the rest of this quarter.If we look at the monthly volumes worldwide, we see it's fairly stable volumes. We start the year with a harvest of little bit over 200,000 tonne, and it will be stable around this level until August, September. Then it will start to increase, and we will be close to 250,000 tonne, the last 3 months. If we look at Europe first, also fairly stable levels until August. And Americas, it's -- yes, very stable for the whole year, so -- and that's good.And Norway, we -- yes, we will be from 90,000 to 100,000 tonne in the first half, and then we will increase to about 120,000 tonne in the last 5 months. So -- and a total increase of close to 6% in volume. On the consumption side, we see fourth quarter growth in consumption of 5%. We see EU up 3%, U.S. 5%, and other markets still taking higher share of the growth and with 8%. And if we look at the full year 2018, a growth of 6%. We see EU up 4%, other markets 8%. U.S.A 8%, very strong growth in the U.S., and we also believe that this growth will continue. And we see Russia is up 25%. We also believe that we will see a relatively higher growth in other markets than -- than the other markets going forward. Then in conclusion, and we believe that the demand for seafood remains strong, and there is a very positive outlook. The harvest guidance for salmon and trout, including associates, is estimated to be around 190,000 tonne. The expected contract share in first quarter will be around 40% to 45%. We see significant potential of improvements in whitefish, and also higher prices. 2019 quarter is -- for cod, is down 6.5%, haddock is down 15%, and -- yes, and we expect that we will have a lot of improvements in the land industry gradually going forward. And yes, that was all. Thank you very much.